Xerox To Investors: 'Please Ignore the Accountant Behind the Curtains'

This morning, Xerox (XRX) reported earnings for 4Qo6.

Xerox Corporation announced today fourth-quarter 2006 earnings per share of 22 cents, including a restructuring charge of 16 cents per share. This compares to fourth-quarter 2005 earnings per share of 27 cents, which included a 5 cent restructuring charge. Excluding restructuring, Xerox delivered adjusted EPS of 38 cents, an increase of 19 percent over fourth-quarter 2005 adjusted EPS of 32 cents.

Sorry Xerox but when you’ve taken restructuring charges in each of the last seven years (perhaps more - we didn’t bother going back farther), you stretch credulity by asking investors to take them out as “one-time” items. On an unadjusted basis, your earnings were $0.22 per share and far below expectations. At least the company finally had a year/year increase in cash from operations.

“Xerox delivered solid performance in the fourth quarter, contributing to another year of double-digit earnings growth,” said Anne M. Mulcahy, Xerox chairman and chief executive officer.”It was a year of steady improvements across the board,” she added. “We grew revenue through stronger annuity and expanded our industry-leading portfolio of products and services. We acquired companies that broaden our share of the fast-growing document management and production color printing markets.

Yet the 3% growth in sales was entirely attributable to changes in currency exchange rates, not operating performance. In other words, not only did the company not grow its underlying business, but they also managed to negate any contributions to sales that were provided by the companies they acquired.

Equipment sale revenue was down 1 percent in the fourth quarter including a 3 point benefit from currency.

OK, so down 4% in operating terms. How is the company going to generate the “annuity” supply and maintenance revenue if there are fewer machines to supply and maintain?

Xerox’s investment in innovation led to the launch of 14 products in 2006 that together earned 208 industry awards. The company expects to more than double its number of product announcements this year.

How about more sales rather than more announcements? Xerox guided to first-quarter 2007 earnings between $0.21 and $0.23, right in line with the 22-cent consensus. We’re sure they will report at least $0.22. The real surprise would be if they did it on an unadjusted basis.

XRX 1-yr chart: